Sign In
    Wisconsin Lawyer
    May 01, 2014

    Cha-Ching: Avoiding Sales and Use Tax Audits of Law Firms

    If a law firm’s vendor fails to collect sales tax on a taxable purchase, the law firm is responsible for self-assessing and paying use tax.

    Steven E. Grimm & Julie M. Bogle

    Cashier drawer

    Although the Wisconsin Department of Revenue (the department) does not release statistics on the number of law firms it audits for sales and use tax each year, our accounting firm has seen a recent increase in the number of law firms being audited for sales and use tax compliance. Although legal services are not subject to Wisconsin sales tax, many items of tangible personal property and certain services purchased by law firms are taxable. This article discusses Wisconsin’s sales and use tax rules as applied to many common purchases made by law firms and offers tips in the event the department selects your law firm for audit.


    Wisconsin imposes a 5 percent sales tax on all retail sales or leases of tangible personal property in the state by a retailer, unless specifically exempted by statute.1 In addition, certain services are also subject to Wisconsin sales tax.2 Most counties also impose an additional 0.5 percent tax on top of the 5 percent state tax.3 Sales in certain areas of the state also are subject to “stadium taxes.”4

    Use tax is the complement to sales tax. If a law firm’s vendor fails to collect sales tax on a taxable purchase, the law firm is responsible for self-assessing and paying use tax.5 Whether the tax paid is sales or use, the amount paid Is the same. For most firms, use tax returns are filed either quarterly or annually, depending on the amount of tax due.6

    Use Tax Liability Often is Overlooked

    No specific exemptions from sales or use tax apply to law firms. Therefore, nearly all purchases of tangible personal property and taxable services by law firms will be subject to sales or use tax. Law firms often make purchases of tangible personal property and taxable services from out-of-state vendors with no physical presence in Wisconsin. Under current law, such vendors are not required to collect and remit sales tax to Wisconsin.7 In addition, certain in-state vendors may fail to properly charge sales tax on the sale of taxable property or services. In either instance, the law firm will be responsible for the self-assessment and payment of use tax.

    For that reason, it is important for a law firm’s accounting personnel to have an adequate understanding of Wisconsin’s sales and use tax rules and to put in place a process to diligently review invoices for potential use tax liability. Departmental audits of law firms repeatedly turn up internal-control failures with regard to certain types of purchases. Some of the most frequently seen are discussed below.

    Legal Treatises and Publications

    Legal references such as treatises and other books are tangible personal property and therefore are subject to Wisconsin sales tax. Periodic updates to reference guides also are taxable. These purchases are taxable regardless of whether the law firm purchases them in paper or electronic format.8 Law firms often fail to report use tax on such purchases from out-of-state vendors, especially when purchases are made online or when a publisher automatically sends periodic updates.

    Steven E. GrimmSteven E. Grimm, U.W. 1997, LL.M. taxation Northwestern, is a partner with the tax department of Smith & Gesteland, where his practice focuses on federal and state tax matters, including Wisconsin sales tax, individual and corporate federal and state income tax, employee benefits, fiduciary income tax, and federal estate and gift tax. He is also a CPA.

    Julie M. BogleJulie M. Bogle, U.W. 1999, is a partner with the tax department of Smith & Gesteland, where her practice focuses on state and local tax, including Wisconsin and multistate sales tax audit management and resolution, tax controversy, nexus analyses, multistate tax planning for income, sales/use, and specialty taxes, and consulting on sales/use tax compliance procedures and documentation. She has a certificate in State and Local Taxation (SALT) from the UW-Milwaukee Graduate School of Business.

    Under certain circumstances, subscriptions to legal publications may be exempt from Wisconsin sales tax as nontaxable “periodicals.” To be classified as an exempt periodical, the publication must be sold by subscription and regularly issued at average intervals not exceeding three months, or not exceeding six months if the seller is an educational association.9

    Forms and Public Records

    Sales by the state of Wisconsin and its agencies generally are subject to sales tax.10 As a result, a law firm’s purchases from a state or local governmental agency of items such as standardized legal forms, maps, plat books, and other printed material are subject to sales tax.11

    There is, however, a specific exemption from sales tax for charges for filing, docketing, recording, or furnishing certified or uncertified copies of legal records.12 This exemption applies to legal records issued by a governmental agency, including certified death certificates, recorded deeds, certificates of good standing, Uniform Commercial Code search records, police reports, and other legal documents. The exemption does not apply to blank forms, medical records, duplicate copies of legal transcripts from a transcription service provider, or any other documents provided by sources other than governmental agencies.

    Software Licenses

    Law firms often purchase “off-the-shelf” software licenses for accounting, word processing, file management, time keeping, email “spam” filtering, virus scanning, and other functions. The sale or licensing of all such noncustomized “canned” software is subject to Wisconsin sales tax.13 Installation and configuration of canned software also are taxable, as are updates; troubleshooting, support, and service contracts; and maintenance agreements for future support of such canned software.14

    In contrast, charges for training law firm personnel on how to use such software are nontaxable services. Custom programming, report writing, and data migration and conversion are also nontaxable if the charges for those nontaxable components are specifically identifiable and separately priced.15

    Cloud Computing

    An important exception to the general rule that canned software is subject to sales or use tax is the use of cloud computing or software as a service (SaaS). A law firm’s purchase of a license to access prewritten computer software through remote access is an exempt SaaS purchase if: 1) the firm’s employees are not located on the premises where the vendor’s server is located and do not operate the server or control its operation; and 2) the prewritten software that is downloaded to the law firm’s computers (for example.a utility program allowing access to the vendor’s server) is incidental to the services being provided by the software (that is, used solely to allow access to the vendor’s hardware and software). Separate charges for prewritten software that is downloaded to the law firm’s equipment are taxable.16

    Computer Hardware

    Purchases or leases of computer hardware, fax machines, copiers, and similar types of office equipment are taxable purchases. These include charges for installation and setup of such hardware and related devices, maintenance agreements and contracts, network configuration, online or on-site troubleshooting of hardware, and inspections of computer hardware.17

    Also subject to sales tax are Internet and telephone wiring and cabling, even when the wires or cables are installed into and hidden behind office walls.18

    Telecommunications Services

    Telecommunications services are subject to sales and use tax. Telecommunications services are defined as any electronic transmission, conveyance, or routing of voice, data, audio, video, or other information to a point or between or among points.19 Such services include voice mail, caller ID, call waiting, directory assistance, fax transmission services, conference bridging services such as Vidyo or GoToMeeting, voice over Internet protocol (VOIP) services, after-hours answering services, and paging services.

    In addition, telecommunications services include any service that allows data to be transmitted, generated, acquired, stored, processed, or retrieved.20 As a result, remote computer-access charges, Internet spam filtering, email management, social media management, and email communications also are subject to sales tax as telecommunications services. Because these types of services often are provided by out-of-state service providers, law firms must be diligent in determining whether sales tax has been charged on these purchases.


    The purchase of graphics and artwork, whether transmitted digitally or in physical form, is subject to sales tax. Purchases of signs, circulars, business cards, stationery, banners, posters, newsletters, brochures, commercials, tapes, and other advertising items, whether in digital or physical form, also are subject to sales tax.21

    The purchase of advertising space in newspapers, and periodicals, and on websites is a nontaxable service. Similarly, the purchase of advertising copy, manuscripts, or news releases is not subject to sales tax. Moreover, advertising consulting, market research, and the compilation of statistical or other market information are nontaxable services. Also nontaxable are mailing services, including the services associated with preparing material for mailing (addressing, enclosing, sealing, metering, and so on).22 As of July 1, 2013, the purchase of advertising and promotional direct mail is exempt from Wisconsin sales tax.23 For purposes of this exemption, “advertising and promotional direct mail” must have as its primary purpose the attracting of public attention to a business or organization. In contrast, the purchase of a mailing list is subject to sales tax.24

    Law firms often hire third-party consultants to assist them with the development and maintenance of the firm’s website. Website and home-page design are not subject to sales or use tax.25 Web hosting services also are nontaxable under Wisconsin law.26 Some services associated with a website, however, are taxableif the charges for those services are separately stated. A charge for the creation of an online video, for example, is subject to sales tax as a digital good (discussed below). Similarly, charges for creating online banner ads and logos are subject to sales tax if separately listed from the underlying website-design fee.27

    Digital Goods

    Wisconsin sales tax applies to a variety of digital goods.28 Common examples of digital goods are electronically downloaded music, movies, and books. Charges for digital graphics and artwork, electronic publications that do not meet the requirements of the periodical exemption described above, and news and other informational products that are transferred electronically are also taxable as digital goods. Under Wis. Stat. section 77.51(3pa), taxable digital audio works are defined as “sounds that are transferred electronically” and can include any prerecorded performance, including speeches, lectures, and training seminars.

    On the other hand, any digital good that in tangible form would not be taxable is not subject to sales tax. For example, viewing a live educational seminar via webcast is not subject to sales tax because attending a live educational seminar in person is not subject to sales tax. Similarly, the purchase of an online newspaper or periodical that meets the exemption requirements for these types of publications in tangible form is not taxable.29

    Audit Tips

    Department’s Audit Techniques. The department normally conducts sales and use tax audits of law firms by field audit. This involves an auditor visiting either the law firm or the offices of the law firm’s accountant or agent to review the law firm’s books and records. In addition, department field audits often involve sampling, as authorized by Wis. Stat. section 77.59(2). For purposes of field audits, the department will select a subset of what it deems to be representative items (such as invoices) from a larger group of items and draw conclusions about the larger group based on the subset it examined. Sampling may be either statistical or nonstatistical. SeeDepartment Publications 516 and 515, respectively, for a discussion of statistical and nonstatistical sampling. The department’s audit findings are presumed correct, and the taxpayer bears the burden of disproving the department’s determinations.30

    Penalties. After conducting an audit and preparing an initial audit report, if the department determines the law firm has use tax liability, the department typically will assess negligence penalties equal to 25 percent of the tax due (excluding interest and other penalties) as provided for under Wis. Stat. section 77.60(3). To impose the negligence penalty, the department must show that the taxpayer’s action or inaction was due to willful neglect and not to reasonable cause.31

    Late-Payment Interest. Upon conclusion of an audit, the department and the law firm normally will enter into a closing agreement, which typically involves the assessment of additional tax. If the law firm had filed sales and use tax returns for the periods under audit, interest on the deficiency amount will accrue at 12 percent figured from the respective due dates of the returns subject to audit through the due date specified in the deficiency notice.32 If the law firm did not have either a seller’s permit or a consumer’s use-tax permit and did not file sales and use tax returns for the periods under audit, interest on the deficiency is assessed at 18 percent.33

    Record Retention. Businesses must keep such records as are necessary to allow the preparation of complete and accurate tax returns.34 Records must be maintained for four years.35 If the department has given notice to a taxpayer to keep certain sales and use tax records (usually as a result of a prior audit), and thereafter additional sales or use taxes are assessed on the basis of information not contained in the records (that is, the taxpayer failed to improve its record-keeping procedures by the time of a subsequent audit), the department may impose a penalty equal to 25 percent of the amount of tax assessed.36 This is in addition to the 25 percent negligence penalty discussed above.

    Statute of Limitation. Sales and use tax returns are generally subject to a four-year statute of limitation.37 If no sales and use tax returns have been filed, however, the statute of limitation does not toll. In those cases, the department’s look-back period is generally six years.


    The sales tax laws applicable to common law firm purchases are very complex. As a result, law firm managers should ensure that their accounting staffs are properly trained to evaluate all purchases, especially those from out-of-state vendors, to determine whether a sales or use tax is owed. Failure to do so could result in the imposition of substantial interest charges and penalties if the department later audits the law firm.


    1 Wis. Stat. § 77.52(1)(a).

    2 Wis. Stat. § 77.52(2)(a).

    3 Wis. Stat. § 77.70(1).

    4 Wis. Stat. §§ 77.705, 77.706.

    5 Wis. Stat. § 77.53.

    6 Wis. Stat. § 77.58(1).

    7 Wis. Admin. Code § Tax 11.97; see also Wis. Stat. § 77.51(13g); Quill v. North Dakota Dep’t of Revenue, 504 U.S. 298 (1992).

    8 Wis. Stat. § 77.52(1)(d).

    9 Wis. Stat. § 77.54(15).

    10 Wis. Admin. Code  § Tax 11.05(1).

    11 Wis. Admin. Code  § Tax 11.05(2)(f).

    12 Wis. Admin. Code  § Tax 11.05(3)(q).

    13 Wis. Stat. § 77.51(10r).

    14 Wis. Admin. Code  § Tax 11.71(2)(b).

    15 Wis. Admin. Code  § Tax 11.71(3).

    16 See Wis. Dep’t of Revenue, Frequently Asked Questions – Computer Hardware, Software, Services,; see also Wis. Admin. Code  § Tax 11.71(3)(d).

    17 Wis. Admin. Code  § Tax 11.71(2)(a).

    18 Wis. Admin. Code  §§ Tax 11.68(7), 11.66(1)(zp); see also Wisconsin DOR Publication No. 207, Sales and Use Tax Information for Contractors (revised March 2012).

    19 Wis. Stat. § 77.51(21n), Wis. Admin. Code  § Tax 11.66(1)(zp).

    20 Wis. Admin. Code  § Tax 11.66(2).

    21 Wis. Admin. Code  § Tax 11.70(2)(c).

    22 Wis. Admin. Code  § Tax 11.70(3).

    23 Wis. Stat. § 77.54(59).

    24 Wis. Admin. Code  § Tax 11.82(1)(b).

    25 PLR No. W 9745007 (Aug. 18,1997).

    26 Wis. Dep’t of Revenue, Tax Bulletin No. 172 (July 2011); see also PLR No. W 1025002 (Mar. 24, 2010).

    27 See Wisconsin DOR Publication No. 235 (April 2012).

    28 Wis. Stat. § 77.52(1)(d).

    29 See Wisconsin DOR Publication No. 240 (revised May 2012).

    30 Wis. Stat. § 77.59(1), (2).

    31 Wis. Stat. § 73.16(4).

    32 Wis. Stat. § 77.60(1).

    33 Wis. Admin. Code  § Tax 11.98(1).

    34 Wis. Admin. Code  § Tax 11.92(1).

    35 Wis. Admin. Code  § Tax 11.92(4).

    36 Wis. Admin. Code  § Tax 11.92(7).

    37 Wis. Stat. § 77.59(3).

News & Pubs Search

Format: MM/DD/YYYY